Four-year election term would help SMEs

A four-year
election term may help prevent smaller firms listed on the
New Zealand Stock Exchange getting into strife as a result
of fast-track policy changes made by new governments, says a
Massey University academic.

Dr Chris Malone, a senior
lecturer in the School of Economics and Finance, says
billions of dollars are lost to the economy because firms,
particularly smaller ones, are unable to cope with policy
changes brought on by a change of government.

“Four
years instead of three in the political cycle would give
government more time to phase in policy instead of rushing
reform through. This could give smaller firms breathing
space to adapt and adjust to the new environment,” he
says.

Dr Malone’s comments arise from the findings of a
research paper he co-wrote with Associate Professor Hamish
Anderson, who is also from Massey University. The paper
found small firms have performed much worse under
left-of-centre governments than right-of-centre governments
since 1972. It also found stock returns are generally
significantly higher under right-of-centre governments.

Dr
Malone says there has been recent global interest in whether
stock markets prefer a right-of-centre or left-of-centre
governments – and that researchers were surprised when
research in the United States showed its stock markets
preferred Democrat governments.

The conventional wisdom
had been that Wall Street liked a Republican government
“but when they went and looked at the long history of
returns they found that during Democrat governments things
whistled along pretty well,” says Dr Malone.

The
opposite, however, is true for New Zealand. While large
firms do relatively well under either the left or right,
small firms have underperformed significantly during Labour
terms. Dr Malone says perhaps in the United States,
Republican governments are more likely to get involved in
wars and external policies that can damage the sharemarket
but, in New Zealand, right-of-centre governments haven’t
had this responsibility and their pro-business focus has
shown through in stock returns.

While it might be
expected that small firms would struggle during periods of
intense reform, such as Rogernomics in the 1980s, the Massey
research found they struggled generally through all Labour
government terms.

“Small firms in particular can’t
handle a changing environment very well. They don’t have
access to professionals; they typically don’t have the
cash resources or the ability to raise cash if things get
tight; and they find it harder to pass on business
risks.”

With an election coming up, Dr Malone says the
study suggests two things. “First, all the parties should
be aware that governments should be cautioned against
changing policy too radically and too quickly.

The second
thing is we should really try to get a four year-term
because it seems governments try to push reforms through
quickly in order to get them in place before the next
election – three years is really not long enough for many
long-term structural reforms.”

Voters, too, should not
encourage radical change as political uncertainty has an
economic cost.

New Zealand’s political system is such
that parties need to create clear points of difference
between each other, “so you often get a party advocating
quite significant change and that’s how they get into
power, but once they get into power they have to implement
some of those reforms and often that can have severe
consequences, particularly on the smaller firms.

“The
significance is that there are clear and significant price
reactions in financial markets when governments change
policy rules. These reactions can be strong if the markets
are caught by surprise or cannot adapt to the new
environment. When businesses fail we lose a tremendous
amount of GDP and wealth. There is a growing awareness that
political uncertainty in general is bad for the economy and
citizens – take for example the impact of it on the value
of the SOE power company floats,” says Dr “We all hold
savings accounts and KiwiSaver accounts so when there’s a
threat to the value of those companies it does affect our
back pocket.”

The paper, ‘Firm Size and the Political
Cycle Premium’, has been accepted for publication in the
international journal Managerial
Finance.

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